With continued load shedding and concerns over Eskom’s survival, plus a continuous negative media stream, which is entirely appropriate given the prevailing circumstances, it’s difficult to be positive in or about South Africa. However, with the JSE up 7% this year, there are many positives that investors need to acknowledge, while being aware of the risks. We highlight these positives and risks in our second quarter market outlook.
Equity markets rebound
Global equity markets bounced up in the first quarter of 2019 with the JSE All Share Index up 7%, having declined 11% in 2018. The upward trajectory was driven by US markets as the outlook for further interest rate increases declined.
Global market sensitivity to interest rate movements continue due to the overall massive debt levels across the world. Rising interest rates are generally bad for equity markets as they slow down economic growth and enhance interest-bearing investments, such as cash and bonds.
Issues currently driving the investment markets:
The positives
Low interest rates – SA inflation is expected to average 4.7% in 2019 per the Reserve Bank. This would mean no further interest rate increases this year and the market is starting to predict the next move will be a cut. This is positive for economic growth and equity markets.
Closing in on corrupt ANC officials – The noose is tightening on some key ANC officials and this should result in some resignations/dismissals, which the country eagerly awaits.
Markets are up – The JSE All Share Index bounced up from a technical low in December indicating that the market has bottomed. Although our view is that markets have turned for the better, short-term uncertainties are likely to still drive volatility throughout the year.
A positive election outcome – Elections in May should see the ANC increase its majority slightly, giving Ramaphosa more support to make more meaningful structural changes. We believe that Ramaphosa’s support from the NEC continues to increase and is currently above 60%.
No Moody’s downgrade – The rating agency has remained sympathetic and postponed their next review to November resulting in no negative change. This has given the government more time to show that they are making meaningful structural changes that will boost economic growth.
Historical low SA valuations – SA shares with local earnings are near historical lows on a price to book and price to earnings multiple basis. Any additional economic growth or positive sentiment will boost their values significantly. This comprises around 50% of the JSE. The other 50% is reliant on offshore earnings drivers.
The concerns
Eskom’s survival – The state of the utility is a major concern and will continue to be a drag on government funds for some years. There are still many unknowns in terms of the full extent of its ‘condition’, but we are confident that Pravin Gordhan will ensure its survival.
Low SA economic growth – The Reserve Bank has lowered its 2019 GDP forecast to 1.3% from 1.7%. This is up from a dismal 0.8% in 2018. But, the outlook for the next two years is still low at 1.8% and 2.0% respectively. This low growth outlook is being echoed by companies giving low earnings growth forecasts.
Politics and the Unions – this is always a precarious relationship. But the time has come for Government to put the interests of the country first and reject unrealistic Union demands. Union dissatisfaction will be one of the major hurdles the economy is likely to face in 2019 and could result in many disruptions. If handled appropriately, it will have positive long-term effects and will be viewed positively by the investment markets.
Slower global economic growth – US interest rates are pointing to a possible decline and Europe is unlikely to raise rates this year. Although the US economy appears healthy, there are concerns that growth is slowing, which is being fuelled by no further tax cut benefits and the trade war with China. We do not see a global or US economic recession, but growth concerns do not support the high earnings base and current equity valuations.
US / China trade talks – the outcome of this protracted jostling is unknown, but this super-power interaction will hopefully enhance relationships. Both countries need each other, and we do not see a substantive, irrational conclusion that will materially disrupt economic growth.
The volatile Rand – The Rand is still driven mostly by emerging market flows, which as a sector, has had numerous political disruptions. The fundamental value of the Rand to the US Dollar is around 12, which we believe will only be realised if a host of significant and meaningful government changes are implemented. Until then, we believe the Rand is likely to remain range-bound between 13.50 and 14.50 to the US dollar.
Investonline Market Outlook
Our first market review for the year was titled “2019 – a year of reckoning” with the key theme being that most of the global and local bad news was priced into markets and that the long-term outlook for equities had improved. Thus far, this view has proved correct as the JSE is up 7% year to date, but this does not mean that it’s time to dive into the market.
A measured approach is still critical as risks (mentioned above) will keep the market uncertain leading to more short-term volatility. Sector selection remains important, such as local vs offshore, developed vs emerging economies, industrial vs financial vs resources. These opportunities are positioned with different fund managers.
Although we believe the long-term outlook has turned positive, 2019 will still have some volatility, which one needs to ensure is accommodated in your investment strategy.